IRS Form 14654 is used when submitting documents for the Streamlined Offshore Voluntary Disclosure Program. The video below has been prepared by a tax attorney at The McGuire Law Firm to provide additional information regarding the Form. You can contact The McGuire Law Firm to speak with a tax attorney regarding your tax matters, including foreign tax accounts and assets.
When an asset is placed into service and depreciation is taken as a deduction, the adjusted basis of the asset will be impacted. The video below has been prepared by a tax attorney at The McGuire Law Firm to discuss this issue. Please remember to always consult your tax attorney, business attorney, CPA and/or other advisers regarding your specific facts and circumstances.
John McGuire is a tax attorney and business attorney at The McGuire Law Firm. You can contact John at 720-833-7705 or via the website at: https://jmtaxlaw.com/contact-us/
Contributions to a 401(k) are qualified deferrals. This means that the amount should not be included in your income when calculating income tax. You can check your W-2 and the amount of taxable wage should not include the 401(k) contributions. The video below has been prepared by a tax attorney at The McGuire Law Firm to provide additional information regarding this matter.
When forming a partnership the partners will make initial capital contributions and may make additional contributions depending upon the operations of the partnership and partnership agreement. Common capital contributions may include cash, property (vehicles, equipment, computers etc.) and sometimes services.
The video below has been prepared by a tax attorney and business attorney at The McGuire Law Firm to discuss capital contributions.
John R. McGuire is tax attorney and business attorney at The McGuire Law Firm. The McGuire Law Firm represents and advises clients on tax matters from IRS debts and tax audits or overall tax planning and the tax implications of certain transactions. Further, the firm represents small and medium sized business with their contract issues as well as the formation and sale of businesses or business interests. In addition to his law degree, John holds an advanced degree in taxation known as an LL.M. The McGuire LAw Firm provides a free consultation with a tax attorney.
Can I deduct my meals as a business expense? Can I deduct this flight as a business expense? Can I deduct the cost of my clothes or uniform as a business expense? As a tax attorney, these are common questions I am asked, and rightfully so as everyone wants to take advantage of all potential deductions allowed by the Internal Revenue Code. Not only is the deductibility of certain business expenses a hot topic with business owners, it is a hot topic and highly litigated topic with the Internal Revenue Service. In fact, I recall reading a recent annual report to Congress by the Taxpayer Advocate Service whereby the deductibility of trade or business expenses he been one of the top ten most litigates issues for a very long time. Furthermore, the same report stated that the courts affirmed the position taken by the Internal Revenue Service (the dissallowance 0f the deduction) in the vast majority of cases and that the taxpayer only prevailed (in full) about two-percent (2%) of the time. The article below is not intended to be legal advice, but rather to provide general information regarding this issue.
First and foremost, we should start with the current law regarding deductions for business expenses. Internal Revenue Code (the “Code”) Section 162 allows deductions for ordinary and necessary expenses incurred in a business or trade. What actually constitutes ordinary and necessary may better be understood through an analysis of the case law, which is significant, surrounding the question. Generally, the determination is made based upon a court’s full review of all facts and circumstances.
Based upon the black and white law under the Code, what constitutes a trade or business for purposes of Section 162. Perhaps it is ironic that the term “trade or business” is so widely used in the Code, but yet, neither the Code nor the Treasury Regulations provide a definition for Trade or Business. Personally, I think it would be quite hard to provide a definition for trade or business, especially under the auspices of income tax. The concept of trade or business has been refined and defined by the courts more so than the Code. The United States Supreme Court has held and stated that a trade or business is an activity conducted with continuity and regularity, and with the primary purpose of earning a profit. Albeit broad, I would agree this definition would be sufficient for the majority of businesses I work and assist.
Now that we have an idea of what may constitute a trade or business, what is “ordinary and necessary?” Again, the Supreme Court has helped provide definitions for these broad, but important terms. Ordinary has been defined as customary or usual and of common or frequent occurrence in the trade or business. Necessary has been defined as an expenses that is appropriate and helpful for the development of the business. Further, it should be noted that some courts have also applied a level of reasonableness to each expense.
Many corporate shareholders may have taken a loan from their corporation. In a prior article we discussed issues related to corporate loans and issues considered regarding the reclassification of a loan. The article below discusses issues and actions a shareholder may consider taking to prevent the reclassification of a loan. Please remember that this article is for informational purposes and it is recommended that you discuss any corporate loan issue directly with your tax attorney, business attorney or other advisors.
Proper recordkeeping and maintaining current promissory notes are of extreme importance regarding this issue. The promissory notes must be kept current and reflect the payments that have actually been made by the shareholder to the corporation, the accrual of interest and other related issues in the previously executed notes. Moreover, the approval of the loans should follow the proper approval and acceptance by the corporation’s board of directors and memorialized via the corporate minutes and other corporate memorandums. The shareholder should also be able to verify that the interest has been paid on the note, the interest should be paid at regular intervals, and at least on an annual basis. Contemporaneous evidence is always important when verifying loan payment and loan treatment to the Internal Revenue Service. From a tax return perspective, the corporate tax return should accurately reflect the loan on the balance sheet.
Because payment of the loan is such a vital factor, I often find it can be helpful to have multiple options or strategies for repayment. Of course, the shareholder can make regular payments on a monthly, quarterly or yearly basis, but there are also other options for repayment. If the corporation has strong earnings and profit, the shareholder could also use a distribution to pay make payment on the loan, perhaps even a lump sum payment to expedite payment on the note. The shareholder may also be able to provide additional services to the corporation and receive bonuses for their work. These bonuses could be paid to the shareholder and then paid to the corporation, or at least taxed to the shareholder as compensation and then reduce the amount of the note.
In short, generally the most important issues will be recordkeeping from corporate documents such as minutes, agreements and returns to the actual promissory note and making sure the shareholder is making payments with interest on the loan.
John McGuire is a tax attorney and business attorney at The McGuire Law Firm. John assists clients with matters before the IRS, tax planning and advice, and business matters from contracts to the sale of business assets and interests.
Often times a payment or payments to S corporation shareholders will be booked or accounted for as a loan to shareholder. Sometimes this is purposefully, other times, it may be due to lack of options. These loans can be advantageous with the proper planning and/or under certain circumstances, but they can also create and lead to unintended and disadvantageous tax consequences.
If a loan is not being treated as a loan (documented, repayment with interest etc.) the loan can be reclassified as a distribution to the shareholder. If the shareholder does not have enough tax basis in their stock, taxable gain will result when the loan is reclassified as a distribution. Further, it is important to note that if a loan is reclassified as a distribution and there are multiple shareholders, the distribution could create disproportionate distributions amongst the shareholders. Not only could the disproportionate distribution be a violation of certain law/business acts, the Internal Revenue Service could determine that the disproportionate distributions created or indicate a second class of stock. As an S corporation, there can only be one class of stock, and thus, a second class of stock could/would result in the termination of the S corporation election, which could have ill intended tax consequences and other business consequences.
Given the above, what can be done in an attempt to prevent payments or disbursements to a shareholder from being treated as distribution, but rather a loan to the shareholder? Generally speaking, the key is proving intent, that the disbursements were intended to be a loan or loans. Below is a list of the issues and factors a court would likely consider when making a determination of whether or not a shareholder loan was in fact created.
- Was the shareholder paying interest? It is also important to note, the IRS can impute interest under the Internal Revenue Code.
- Is the amount/loan being repaid by the shareholder?
- Is the debt evidenced by a written instrument such as a promissory note, with stated interest, payment terms & conditions and a maturity date?
- How has the disbursement to the shareholder been recorded and reflected within the S corporation’s books
- If the shareholder was in arrears of any payment, did the corporation attempt to enforce or require payment
- Did the shareholder have the financial wherewithal to repay the note when the loan was provided by the corporation
Of all the above issues & factors, perhaps the most important is whether or not the shareholder was actually repaying the loan. Courts have determined a loan existed even without documentation and promissory notes given the shareholder was making payments.
The above article has been prepared by John McGuire of The McGuire Law Firm for informational purposes. John focuses his practice on tax matters before the IRS, advising individual & business clients on tax planning and tax related issues and business transactions from business formation and contracts to the sale of a business or business interest.
If you take mileage as a deduction on your income tax return, the IRS audit tip below may help you. Many individuals will claim mileage as a non-reimbursed employee expense on Form 2106, or if self-employed, on a Schedule C, or the deduction may even be stated on another business income tax return. Most individuals know that to substantiate the mileage deduction they need to keep a mileage log stating where they drove, the total mileage and other information such as the business purpose for the travel. What many individuals may not be aware of is that the IRS may also request them to verify the total mileage driven on their vehicle with third party records. This issue is discussed below in greater detail.
Recently, I was involved with an individual income tax audit with a client over multiple periods of 1040 Schedule C (self-employed) filings. The individual drove a decent amount in their business and had taken the mileage deduction on multiple vehicles that were used for business purposes. The individual had maintained mileage logs for each vehicle and properly claimed the deduction on their schedule C. During the audit, the IRS examiner requested that the individual obtain maintenance records to substantiate the total miles driven in each vehicle during the year. This request was not to produce a mileage log of business miles driven, but records from oil changes and other maintenance records to show and verify the total number of miles, personal, business and commuting, over the course of the year. For example, the examiner wanted to see the report from Grease Monkey stating the total mileage on the vehicle and be able to track and substantiate the mileage driven to see if the business miles claimed appeared reasonable and within the total mileage driven on the vehicle.
After the above incident, it is apparent the IRS is not only requiring a mileage log, but some form of 3rd party document to verify that the miles claimed are in line with the actual miles driven. This being said, in addition to maintaining a mileage log, it is apparent that taxpayers taking the mileage deduction would be best served by maintaining all reports and maintenance records to verify their mileage. Remember this the next time you take your car to the shop for an oil change or any repair! It is probably best to even make a copy of the maintenance records and maintain the document with your mileage log and other tax related documents. Tell your mechanic to keep the receipt clean!
John McGuire is a tax attorney and business attorney at The McGuire Law Firm. Mr. McGuire’s practice focuses on tax issues before the IRS, tax planning, business transactions and tax implications to his individual and business clients.
If you have reviewed partnership agreements or operating agreements for an LLC you have probably read provisions relating to Minimum Gain Chargeback. That being said, the Minimum Gain Chargeback provisions may have put you to sleep, and may not even be practical based upon the facts and circumstances of the partnership. However, Minimum Gain Chargeback provisions are important to understand if in fact they were to apply to your situation and circumstances. The article below has been prepared by a tax attorney and business attorney from The McGuire Law Firm to provide an explanation of Minimum Gain Chargeback.
Minimum Gain Chargeback provisions deal with non-recourse debt and the allocations of non-recourse debt. Such provisions are mandatory if the partnership wishes to allocate non-recourse deductions to the partners in any manner other than per the member’s pro-rata portion of capital interest in the partnership. Therefore, it is important to identify when a Minimum Gain may be realized. Minimum Gain occurs when deductions are claimed on property that decrease the partnership’s book basis in the property below the actual balance of the non-recourse debt on the property. A situation whereby you may see Minimum Gain is when property is depreciated. The depreciation will drive the partnership’s book basis of the property below the amount of the loan on the property. When a partnership does have Minimum Gain, the Minimum Gain Chargeback is an allocation of the gain to the partners or members who have received the benefit of non-recourse deductions, or who may have received distributions from the partnership that can be attributed to the non-recourse loan. In short, if a partner has received a benefit from the depreciation of property whereby they did not bear the economic risk of the loan to acquire the property (because the debt was non-recourse and not personally guaranteed), the benefit can be “charged back” to the partner.
So when does the “charge back” occur? The deductions or distributions taken by the partners are charged back when the property that was subject to the non-recourse debt is sold, transferred or otherwise disposed of, or when there is a change in the character of the non-recourse debt. A change in the character of the non-recourse debt could be the debt converted to a recourse liability or the debt being forgiven.
Now, the million dollar question: What is the amount of the charge back? The partnership’s minimum gain is generally going to be the excess of the non-recourse liabilities over the adjusted tax basis of the property subject to or securing the non-recourse debt. Perhaps an example will help illustrate this. Assume J&J, LLC had purchased property for $200,000 and took $100,000 in depreciation on such property. Thereafter, J&J LLC obtain non-recourse financing of $250,000. The minimum gain would be $150,000, which is the non-recourse debt of $250,000 less the adjusted basis of $100,000.
It is important to remember that a partner is not subject to a charge back for monies they contribute to repay a non-recourse debt, and it is possible for the partnership to request a waiver of the chargeback under certain circumstances.
John McGuire is a tax attorney at The McGuire Law Firm whose practice focuses primarily on tax matters before the IRS, business transactions and tax issues as they apply to his individual and business clients. In addition to his law degree, John holds an advanced degree in taxation (LL.M.). Please feel free to contact John with any questions.
In any corporate acquisition, there are tax and non-tax issues, multiple business considerations and goals of the parties involved with the transaction. The tax planning that is involved before, during and after the acquisition process may include many options and alternatives to achieve the tax and non-tax wishes and goals of the parties. Thus, one of the most important steps in the planning process of a corporate acquisition is to discuss and review the party’s intentions and goals, which may include short term matters and long term matters.
First, we need to identify the parties. In any corporate acquisition you will have the buyer who is looking to acquire one or more businesses that are operated and owned by another business. The seller, which may be referred to as the “target” or “target-corporation” may wish to be disposing of the business in exchange for some type or form of consideration, or merge in some way with the buyer. Broadly stated, the buyer may wish to purchase the stock of the target corporation, or acquire the assets of the corporation. Thus, in general, you can consider the purchase options to be a stock purchase or asset purchase of the target. Furthermore, there is the possibility that the acquisition could be a hostile acquisition. A hostile acquisition involves the acquisition of a publicly held company, like Wal Mart. The acquisition begins without any agreement between the purchaser and the target corporation. It is possible that through a hostile acquisition, the target may not even wish to be acquired or purchased by the buyer.
It is likely that the single most important factor in an acquisition will be the consideration to be paid or consideration received by target (property, stock and other items could be used as consideration). Thereafter, an important issue to consider and understand is whether the shareholders of the target corporation plan to or wish to have an equity ownership in the combined entity after the acquisition is completed, or if such shareholders wish to sell their entire ownership interest in exchange for a cash payment or other financial benefit. This issue will likely dictate the overall consideration involved and will, in many respects, control the overall structure of the transaction as well as the characterization of the transaction for tax purposes (taxable versus tax free). For example, if the parties wished to have a tax free reorganization, a common theme in a tax free reorganization is continuing ownership interest in the combined business by the previous shareholders of the target business. The transaction may only be able to qualify as a tax-free reorganization if a substantial portion of the consideration paid is the stock of acquiring corporation, or perhaps the stock of the acquiring corporation’s parent. Thus, consider whether or not the target shareholders receiving shares of the acquiring corporation would be practical if in fact the some or all of the target shareholders wished to receive cash consideration for their ownership interests. This example illustrates how the goals and wishes of the parties involved can dictate the transaction structure and thus the tax implications to the parties.
The above article has been prepared by John McGuire of The McGuire Law Firm. As a tax and business attorney, Mr. McGuire’s practice is focused on tax planning, tax matters before the IRS and business transactions from business start-ups & formation, to business contracts & acquisitions. You can schedule a free consultation with a business attorney at The McGuire Law Firm by calling 720-833-7705.
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